Special Report: Global Financial Crisis

    by Xinhua writer Yang Lei

    NEW YORK, March 25 (Xinhua) -- Crude oil has staged a strongly rally into March with prices gaining more than 30 percent to date. Current crude future contracts surged near 54 U.S. dollars a barrel on the New York Mercantile Exchange (NYMEX), and both NYMEX and Brent crude prices hitting the highest level since Nov. 28, 2008.

    But as the global economic downturn intensifies, the recent rally would probably be a short-term bounce rather than marking a sustainable growth.

    The slumping energy demand brought by a global economic turmoil had sent oil prices plunging to the level of 30 U.S. dollars a barrel from a peak of 147 dollars reached last July. Since last December, oil prices, after an initial rally into 2009, have settled in a loose range between 30 and 50 dollars a barrel.

    Prices started to pick up before OPEC's Vienna meeting in mid-March. "The latest rally is rebounding from the most recent lows in mid February when oil has fallen to 34 dollars a barrel, and supported more recently by recovering in equity indices and speculation about further OPEC supply cuts," wrote Harry Tchilinguirian, a senior oil analyst at BNP Paribas, in a note to Xinhua.

    OPEC decided to keep its oil production quota unchanged at the Vienna meeting, which to Tchilinguirian was much expected by the market. "Sacrificing additional volume to reach OPEC's implicit target of 24.85 million barrels per day is more difficult when government revenues are strapped by weak oil prices," he said.

    The oil cartel so far has been successful in implementing the targeted cuts with nearly 80 percent already accomplished. "The second wave of supply cuts will be harder to deliver," said Tchilinguirian.

    Another uncertainty with the supply drop is the cooperation from non-OPEC producers, which are playing more important roles in the world oil market. Russia, believed by many analysts to have become the largest oil supplier in the world, has seen its fiscal revenues slashed last year as oil prices took a dive. Despite seeking closer ties with OPEC, like attending several OPEC meetings as an observer and voicing support for the production cut, Russia refused to make a promise to decrease its oil output at the Vienna meeting.

    Oil has also gained support from a weakening dollar as usually investors would use commodities like crude as a hedge against inflation. "The recent announcement by the U.S. Federal Reserve of its intention to purchase over 1 trillion dollars worth of government bonds and mortgage-backed securities has served to put additional pressure on the value of the dollar as this is viewed by the market as creating a lower yield and fanning the flames of inflation," Wall Street Strategies' senior research analyst Conley Turner told Xinhua.

    But with the global economic downturn still deteriorating and the United States, world's largest oil consumption country, experiencing the most severe recession since the Great Depression, inflation is unlikely to develop before next year.

    "The quantitative easing by the Fed is unlikely to rekindle inflation given the wide output gap in economy (i.e. how much below potential the economy is operating)," said Tchilinguirian. "You need to distinguish the impact of the Fed news on market sentiment, allowing it to boost price very short term, from the actual economic conditions that still point to lower oil prices."

    On Saturday, World Bank President Robert Zoellick projected that the world economy is set to shrink by 1 to 2 percent this year, a figure unseen since World War Two. And earlier International Monetary Fund predicted that global economic recovery won't come until 2010.

    With housing market not yet bottoming out and jobless rate still on the rise, energy demand is not expected to pick up anytime soon. The latest report from the U.S. Energy Department shows that, during the week ended March 20, crude inventories jumped 3.3 million barrels to 356.6 million barrels, an increase far more than analysts' expectation. Current crude inventory is 15.6 percent higher than a year ago and is the highest level since July 23, 1993.

    "As we move out of winter, we lose the seasonal support from heating demand, and all we have left to support oil demand is the economy -- not a particularly bullish factor for the economy," said Tchilinguirian.